HMRC has recently updated its guidance in respect of three EMI qualification criteria: the gross assets test (currently £30m), the maximum number of employees test (currently 250 full time employees) and what counts as an excluded activity. The Employee Tax Advantaged Share Scheme User Manual (ETASSUM) can be found here, although the updates page does not yet reflect the most recent amendments.

HMRC guidance in ETASSUM confirms which companies can grant Enterprise Management Incentive (EMI) options as well as which employees are eligible to receive them. 

Provided the qualification criteria are met, the EMI regime is perfect for companies with substantial growth potential who want to retain and incentivise key employees. 

Maximum number of employees test

Where a company employs seasonal workers (e.g. Christmas temps), the number of employees varies over the course of the year and so it can be difficult to determine the actual number of employees. However, it is not necessary to calculate an average of the employees for this test. Instead, the number of employees must be less than 250 on the date that the EMI options are granted, so effectively a company could have more than 250 employees at one point in the year and still be eligible. 

Gross assets test

HMRC also stated that for the purpose of the gross assets test where a company’s assets must not exceed £30m, advance payments for shares should be ignored, whereas the unpaid portion of a partly paid share should be included. However, the previous guidance referred – incorrectly – to the gross assets test being completed before the issue of shares, rather than at the time the EMI options are granted to the employees.  The new guidance corrects this error.

Excluded activities

Finally, the guidance has provided further information as to what amounts to wholesale and retail distribution. 

Dealing in goods, otherwise than in the course of an ordinary trade of wholesale or retail distribution is an excluded trading activity and would therefore prevent a company from being eligible to operate EMI. 

The updated guidance now states that the features that may indicate that the trade is a normal wholesale or retail distribution includes: the vendor buying larger quantities than they sell, that the goods are bought and sold in different markets and that the vendor employs staff and incurs expenses in addition to the cost of the goods. 

The guidance specifically states that where a trade exists ‘to a substantial extent’ of dealing in goods which are collected or used as an investment, as well as holding them for longer than expected if they were going to be distributed, then it cannot be an ordinary trade of wholesale or retail distribution. The new guidance suggests that consideration will be given to the length of time and the type of goods acquired in deciding whether the action constitutes an excluded activity.